|
China’s Rapid
Export Growth
|
 |
|
As China increases its supply of goods on
world markets, this is likely to put downward pressure on world prices of
these goods and thus lead to a deterioration in China's terms of trade.
|
Over the past 15 years, China's exports
have jumped more than tenfold, far exceeding the tripling of world trade that
has taken place over the same period. As a result, in 2004, China overtook
Japan as the world's third largest exporter, just behind Germany and the
United States. Not surprisingly, this growth has attracted a lot of attention
among media, academia, and policymakers. Insights into the driving forces
behind this growth could help identify how best China and other countries
could benefit. Moreover, countries wishing to emulate China's success may find
lessons worth replicating.
How has China achieved this phenomenal
export growth? Recent studies highlight the sophistication of its exports, the
diversification of its product mix, and the growth in new varieties.
Sophistication could be important if these products have higher productivity
growth. Diversification might aid growth by lessening the impact of shocks to
specific sectors and by facilitating new export discoveries. Exporting new
products might allow exports to grow rapidly with less downward pressure on
export prices.
To better understand these mechanisms,
we recently undertook a study that decomposes the export growth in several
novel ways. Our findings indicate that, despite a dramatic move out of
agriculture, apparel, and textiles into electronics and machinery, China's
overall export structure has become more specialized, not more diversified.
And China's growing sophistication of its exports is largely thanks to
processing trade—the practice of assembling duty-free intermediate inputs.
Reallocating
across sectors:
As a first step, we compare a snapshot of China's export sector in 1992 with
one from 2005 by examining how the composition of its exports has changed. We
find that it has undergone a dramatic transformation since 1992. There has
been a significant decline in the share of agriculture and soft manufactures,
such as textiles and apparel, with growing shares in hard manufactures, such
as consumer electronics, appliances, and computers.
Breaking it down
further, we take a look at changes within the manufacturing sector. In
particular, we examine how trade shares have adjusted in all major sectors,
which together comprise about 70 percent of China's manufacturing exports. We
find that there is a notable move out of textiles, apparel, footwear, and toys
and into office machines, electrical machinery, and telecommunications.
|
The export price decline in China is
consistent with a negative terms of trade effect, with increased exports
pushing down export prices.
|
 |
Getting more
sophisticated:
Does this move into electronics and telecommunications mean that China's
manufacturing exports have become more skill intensive? Over the past few
years, several studies (Rodrik, 2006; Schott, 2006) have highlighted the
surprising sophistication of China's exports, suggesting that they tend to
look a lot more like industrial country exports than would be expected given
China's income level. The sophistication of China's exports in combination
with the country's robust income growth leads Rodrik to the conclusion that
what a country exports matters for its future growth. The idea is that
producing high-productivity goods has greater growth benefits than producing
other goods—computer chips are better than potato chips.
To see whether the skill content of
China's export growth has increased over the past 15 years, we look at the
share of export products that are mid to high skill—defined as products that
are ranked above the bottom 20 percent in terms of skill intensity. Because
industry skill-level data for China were unavailable, we base the skill
intensity ranking on information from Indonesia—another emerging market
country that is likely to have similar technologies. (We also used U.S. data
on skill rankings and the results are nearly identical.) We find that, in
1992, 45 percent of exports were in these mid- to high-skill products, but by
2005, the export share of these industries had risen to 68 percent.
But, given the large share of processing
trade in China, an increase in the skill content of China's exports could be
due to China importing intermediate inputs with higher skill content that it
then assembles for export. Indeed, when we exclude processing trade, the
increasing share of trade in mid- and high-skill industries is much smaller.
This result is even stronger at higher skill levels, with processing trade
accounting for the entire increase in the share of trade in high-skill
industries.
We also explore changes in the pattern
of China's imported inputs to see if the increased skill content of processing
exports is coming from the foreign or the domestic stage of production.
Comparing the change in the skill content of imported manufacturing inputs for
processing trade with the change in the skill content of imported inputs for
nonprocessing trade, we find a much larger increase in the skill content of
processed imports. The results imply that the increase in skill content in
China's exports is likely because of the increase in the skill content of
imported inputs embedded in these exports.
Becoming more
specialized: In
recent years, many governments have begun promoting a more diversified export
structure in hopes of offsetting potential negative shocks in major sectors.
This approach picks up on the thinking of economists such as Hausmann and
Rodrik (2003), who argue that in the early stage of development, more
entrepreneurship and potentially greater diversification may help producers
identify and expand production of new products in which they are globally
competitive. Similarly, Imbs and Wacziarg (2003) find that greater
diversification of production has gone hand in hand with income rising from
low levels, suggesting it could be an important stage of growth. But
traditional theory highlights enhanced specialization as the way to benefit
from trade: if each country exports goods in which it has a comparative cost
advantage, world output and welfare should rise.
To see whether
China has moved in the direction of greater specialization or diversification,
we look at the distribution of exports over time. We find that despite an
increase in China's total number of export products, the degree of
specialization has increased slightly. The increase is especially notable in
the top-ranked products. The top 10 export products now account for nearly 25
percent of export value, whereas the top 10 in 1992 accounted for just 10
percent of export value. Similarly, the top 100 products account for 54
percent of trade compared with 45 percent in 1992. These results imply that,
if anything, it is increased specialization that has contributed to export
growth, consistent with recent work by di Giovanni and Levchenko (2007), which
finds that increased trade is accompanied by specialization in a large cross
section of countries.
Favoring
existing products:
Is China exporting new products?
Recent research shows a strong correlation between the number of export
products and income levels in cross-country data (Hummels and Klenow, 2005).
The evidence suggests that income growth leads to the development of new
varieties. This is consistent with new trade theory, which shows that the
number of goods produced in an economy increases with the size of the economy.
In addition, growth in new product varieties is beneficial for exporters
because it will likely offset some of the downward pressure on export prices
from an increased world supply of goods. In contrast, traditional theory only
allows for an expansion of existing exports as income expands.
To explore the importance of new
products, we decompose China's export growth from 1992 to 2005 using
international product codes, the most detailed level of disaggregation that is
comparable over time. Because these data are too aggregated to allow entirely
new products to be identified—by 1992, China was exporting in more than 90
percent of these categories—we split exports into deciles by value in 1992 and
calculate their share of exports in 2005 (as in Kehoe and Ruhl, 2003). If
export growth arose mainly from new product varieties, there would be rapid
growth in the bottom deciles, where trade was negligible in 1992. The data
reveal that the categories that accounted for the bottom 20 percent of trade
by value more than doubled in 15 years, whereas the categories in the other
deciles contracted or remained constant.
A key concern in using this type of
calculation to assess the importance of new export varieties is that exports
tend to be highly skewed—the smallest two deciles account for the vast
majority of product categories, and thus it is natural to expect these two
deciles to exhibit high growth. For that reason, we evaluate the reallocation
in more detail by dividing exports into deciles according to the number of
categories of trade in 1992. For example, the tenth decile is the top 10
percent of product categories when products are ranked by value. The decline
in the share of the top decile shows that there was a sizable reallocation of
trade, but it was not the bottom 50 percent of products that gained. Over 80
percent of the decline in the trade share of the top decile was accounted for
by an increase in the trade share of the four deciles just below the top. In
sum, the results imply that there was a significant reorientation in exports
to products that were in the bottom 20 percent by value but in the mid to high
range by product rank.
We also perform more detailed analyses
using tariff line data from the United States, which are far more
disaggregated, with over 16,000 product codes. Our results show that the
majority of growth—at least 80 percent—stemmed from existing products. This
implies that export expansion was driven by goods that were already being
exported in 1992.
Declining export
prices: As China
increases its supply of goods on world markets, this is likely to put downward
pressure on world prices of these goods and thus lead to a deterioration in
China's terms of trade. Since we find that most of China's export growth is
from existing goods, this is especially likely to be an issue. Product
differentiation could lessen price effects if new products were not good
substitutes for existing goods.
Taking the subset of goods that China
exported to the United States from 1997 to 2005 (for which reliable price data
are available), we construct an average export price index that is a weighted
sum of the growth rates of the prices of the various products, where the
weights are the products' shares in total value. We find that the export price
index for China over this period is 0.87, indicating a fall of 13 percent in
current U.S. dollars. In contrast, the price index for exports of these same
products from the rest of the world to the United States is 1.06, indicating a
6 percent increase in prices. Thus, it appears that the rapid export growth
has been associated with a decline in China's export prices over the period.
The export price decline in China is
consistent with a negative terms of trade effect, with increased exports
pushing down export prices. However, it could also be related to improved
productivity in China, declining profit margins, or exchange rate movements.
This is an important topic for future research.
Going forward:
By decomposing
China's spectacular export growth of more than 500 percent since 1992, we were
able to tease out a number of findings, some of which may help guide
policymakers.
First, the dramatic transformation of
China's export structure over the past 15 years implies that its business
environment is relatively flexible, enabling it to move in and out of
different sectors. In terms of the flexibility of employment, China ranks
roughly on a par with East Asia and the Pacific and significantly higher than
averages from the other regions, including those that contain industrial
countries, according to the World Bank's Doing Business 2007 indicators.
Further, the cost of opening a business in China is 9.3 percent of average per
capita income, compared with more than 40 percent on average in Latin America
and East Asia and the Pacific. In light of this experience, a lesson for
countries seeking to follow China's lead is that the export sector must be
allowed to change as it grows.
Second, our results point to an export
sector that is taking advantage of China's large supply of workers and of the
increasing fragmentation of production across countries currently under way,
especially in Asia. The increased amount of processing trade has enabled China
to export increasingly sophisticated products by assembling high-quality
duty-free imported inputs. In the process, exports of many goods have
increased dramatically, leading to enhanced specialization. This is a
traditional story consistent with a traditional policy recommendation.
Lowering trade costs, both tariff and nontariff barriers, and getting prices
right are likely to help resources move to their most productive uses. Indeed,
China's average tariff has come down from about 45 percent in 1992 to 10
percent today, which has surely facilitated the transformation.
Third, our finding that China's rapid
export growth has been accompanied by falling export prices implies that
consumers around the world have benefited from lower prices. While China's
export and income growth have remained robust in recent years, growing exports
could push prices down further, with exporter profits eventually suffering.
Going forward, exporters may have incentives to offset declines in export
prices by expanding into new products and differentiating their products from
those of competitors. |
